Why invest in real estate?

That is a damn good question. It’s so risky and confusing with so many options out there and just as many scammers just waiting to take all your hard earned money. Why bother trying to cut through all the crap to find that elusive real estate investment that’s going to pay for your retirement without making you broke in the meantime.

You constantly hear stories of ‘tenants from hell’ and trust me every investor has at least one – my worst experience with a tenant was some young dole bludger couple in New Zealand who thought the world owed them everything and that they didn’t have to pay any rent to live in my house. When I suggested it would be a good idea for him to catch up on their 8 weeks rent arrears he named my house address and mentioned he had a knife and was coming to stab me.

So, what’s the point? Why this obsession by every middle income earner to buy an investment property? Why not just go to your 8-5 job, what ever it may be, and spend any extra income you earn on holidays for your family, jewellery for your wife and cars for yourself?

2 reasons. Land and leverage. There is a finite supply of land on our current planet and seeing that we are currently adding around 230,000 people to this planet EVERY DAY (that’s 83 million per year) personal space on this land is becoming more and more valuable every day. Land can’t become less valuable unless more people die than are born – if that begins to happen then sell your real estate and get into the coffin business. Leverage – the average 4 bed house price in Auckland, New Zealand right now is over $1mill. How long would it take you to save a million dollars? If you earned $100,000 which is a relatively decent wage in Auckland and managed to save 10% of your salary every year, it would take 100 years – so no-one would buy homes besides the ultra wealthy if leverage didn’t exist. Luckily, it does, and you can borrow anywhere between 50% – 95% (sometimes over 100% as in the 2007 sub-prime mortgage collapse in the US – but if that’s happening around you, hold onto your cash and wait for the cards to fall over then buy as much as you can afford to). So if you could borrow 95% of the value of a $1mill property you’d only need to save for 5 years to be able to cover the $50,000 deposit. (based on the above assumption)

The average capital gain in median house price across Auckland, Sydney, Melbourne and Brisbane since 1970 has been over 9% per year. What that means is if you purchased that $1million house in Auckland and the value increased by 9% per year, you’d essentially be putting $90,000 into a savings account every year. So you’ve doubled your salary by buying one investment property – and guess what? That $90,000 you’ve saved is enough to buy another $1million house. I think the question should rather be: “Why doesn’t everyone invest in real estate?”